GSK’s (LSE: GSK) share price has jumped 42% from its 9 April one-year traded low of £12.42.
This followed a series of strong results over the past year or so. The latest of these – Q3’s numbers released on 29 October — were no exception.
That said, there could still be value in the stock, as its true worth could be much higher than its current price.
So, does such a gap exist in GSK’s shares, and if so, how much is it?
Q3 sales boost and new products
The Q3 figures showed turnover up 8% year on year to £8.547bn, led by a 16% increase in Specialty Medicines to £3.4bn.
GSK’s Respiratory, Immunology & Inflammation segment rose 15% to £1bn. Oncology jumped 39%, and HIV rose 12%. Vaccine sales were also up – by 4% to £2.5bn.
The pharmaceutical giant additionally reported four major new product approvals so far this year. It is also advancing 15 major pipeline opportunities expected to launch between 2025 and 2031. Each has a peak-year-sales potential of more than £2bn.
Big profit growth rises forecast
A firm’s earnings (or ‘profits’) growth is the key long-term driver for its share price (and dividends).
A risk to GSK’s is any increase in US tariffs on pharmaceutical products. This has been a concern since the widespread imposition of these levies on 2 April.
That said, the firm stated that it is positioned to respond to such a scenario, with mitigation options identified.
It also noted that its 2025 guidance and beyond includes the tariffs enacted to date. This further consists of the potential impact of the 15% US tariffs on GSK’s products manufactured in and exported from the European Union.
Given its strong Q3 figures, GSK upgraded its 2025 turnover growth forecast to 6%-7% (from 3% to 5%). It now projects core operating profit growth of 9%-11% (previously, 6%-8%). And it estimates core earnings per share growth of 10%-12% (from 6%-8%).
Further forward, GSK now expects sales of more than £40bn by 2031, compared to the earlier £38bn.
So what about the valuation gap?
Price is whatever the market will pay — driven by supply and demand and changing constantly. Value, on the other hand, is what the stock is actually worth, often referred to as its ‘fair value’. That is based on company fundamentals, with earnings growth prospects being the most important.
In my experience, asset prices move over the long term toward their fair value — whether up or down. That is why the potential to make significant long-term gains by spotting the gap between price and value is so great.
The best tool I have found for doing this is discounted cash flow (DCF) analysis. It uses cash flow forecasts for the business to estimate where the share price should be.
In GSK’s case, the DCF shows its shares are a stunning 63% undervalued at the current £17.68 price. That implies a fair value of £47.78.
My investment view
I bought GSK shares initially based on their strong earnings growth prospects and extreme undervaluation.
Given that the recent results confirm the former, and the DCF reiterates the latter, I will buy more very soon.
I am also looking at several other stocks I believe are similarly undervalued and present terrific investment opportunities.
